Lycos (Nasdaq: LCOS) shareowners -- if you can call them that -- are singing their happy songs today. Last night, this leading Internet hub reported upbeat third quarter earnings, which pumped its stock up $4 1/16 to $117 today. Balancing out such good news, though, are the implications of the recently nixed deal to merge Lycos with properties controlled by Barry Diller and USA Networks (Nasdaq: USAI). The question raised by that debacle is simple: Are Lycos investors -- and Internet investors in general -- prepared to own actual businesses rather than simply trade stubs?

First the good news. Lycos' revenues hit $35.1 million, up 132% from the year-ago period and 15% versus the second quarter of FY99. Advertising revenues doubled to $23.6 million while revenues from "e-commerce, license and other" more than tripled to $11.5 million from $3.4 million last year. Year-to-date, the company's revenues now stand at $90.4 million, up 144%. Excluding goodwill amortization charges from recent acquisitions, the firm reported a loss of $1.0 million, or $0.02 per share. That improved on the Q2 loss of $1.5 million, or $0.03 per share, while also besting the consensus earnings estimate calling for a loss of $0.03. Including amortization charges, the net loss was $13.3 million or $0.31 per share.

Among the highlights, Lycos signed up $200 million in new commerce business in the quarter, pumping deferred revenue up 138% to $148 million. Along with contracts with Audio Book Club(AMEX: KLB), AutoByTel (Nasdaq: ABTL), and Auto Connect, Lycos inked a $52 million pact that will make WebMD -- in acquisition talks with Healtheon(Nasdaq: HLTH) -- its exclusive provider of healthcare-related content and e-commerce. Traffic to the Lycos Network of sites (which include the Lycos portal, the HotBot search engine, and community sites Tripod and Angelfire -- 4 of the top 20 Web sites), also increased nicely. Daily page views rose 20% during the quarter to 60 million and the Lycos Network grew its base of registered members by 29% versus Q2 to 27 million. Lycos now reaches 31.9 million unique users or about 52% of all Internet users.

Yet, maybe the most enticing news was that the company plans a 2-for-1 stock split in late July. After all, stock splits have become the easiest way to pump up a stock. And like ticket scalpers, Lycos "shareowners" seem to have little interest in the main event -- in this case, building a business. They just want the highest price for their stubs.

Led by David Wetherell, Chair and CEO of Internet venture capital firm CMGI(Nasdaq: CMGI), which owns about an 18% stake in Lycos, this Internet portal's investors examined the merger offer from USA Networks with all the rationality of whining babies that had lost their bottles. These speculators live in a world colored by blind, unthinking greed, a world that's completely divorced from the ugly realities that make capitalism actually work. That's why the collapse of the Lycos-USA deal seems to represent the triumph of speculation over actual e-commerce, the triumph of Internet hype over business reality.

It's important to recall that Lycos CEO Bob Davis and his entire team were enthusiastic supporters of the deal, which would have given Lycos shareholders an initial 30% stake in a new firm consisting of the Lycos properties, Ticketmaster Online-CitySearch(Nasdaq: TMCS), and USA's Home Shopping Network and First Auction site. The new $18 billion entity would have had roughly $1.5 billion in annual revenue, $165 million in cash flow, a profit before goodwill amortization, and a clean balance sheet with about $250 million in cash. Compare these numbers with Lycos' latest earnings report, and it's clear that Diller was bringing a lot to the merger.

Davis saw the deal as a chance to create an e-commerce powerhouse. As he said in February, "I had dialogue with a pretty wide spectrum of different companies. Traditional media companies provided to Lycos and its shareholders one and only one asset: it provided promotion. The USA deal gives Lycos an actual e-commerce infrastructure along with the promotional synergies." Thanks to its Home Shopping assets, USA Networks has an existing credit card database of 20 million customers plus the distribution capacity to process one million transactions and ship 200,000 orders per day. So Diller could have done more than expand Lycos' reach; he could have maximized the financial potential of its current audience by creating a seamless integration of content and commerce all within the same firm. It was a deal that promised genuine business synergies.

As Lycos director, Wetherell initially backed the deal, announced when Lycos shares traded at $127, or 129% above where they began the year. No surprise there given that Wetherell was happy to sell 900,000 Lycos shares (9.4% of CMG's stake) in January for $52 a share. Clearly, this would have been an insane thing to do if Wetherell were convinced that Lycos is worth double or triple that amount. But the negative reaction to the merger announcement quickly cut Lycos to $77 a share.

When it became apparent USA Networks would not sweeten its offer, Wetherell said Diller was stuck in an old-media mindset and just doesn't get the Internet. In one sense, that's right since Wetherell is the patron saint of Internet speculators. The Internet to him is about getting as rich as possible before the party ends. Apparently, Wetherell had himself underestimated the greed that drives speculators into a Lycos at $145 a share looking for greater fools. Now he gets the Internet.

Once Wetherell quit the Lycos board and pledged to vote against the deal, though, Lycos' fate was left in the hands of daytraders. The Wall Street Journal has reported that 65% of the stock was in the hands of such traders. Davis put the figure at no more than 35%. Even so, about 20% of shareholders typically fail to cast their votes in such proxy battles, becoming automatic nays. So with CMGI's 18% stake already in the nay camp, Diller and Davis needed to persuade a substantial contingent of speculators to win a majority. That, they realized, was impossible. As Davis told Reuters recently, "It's the first transaction anywhere that tried to put together new media assets and traditional assets, and I think a lot of people, including myself, misjudged the market reaction to that type of deal."

Ordinarily, when a board signs a merger deal that's contrary to the interests of shareowners and those investors flatly reject it, one chalks it up as a victory, just market capitalism in action. The question, though, is whether Lycos' owners have made the best business decision, the one that actually maximizes their long-term payoff.

Traders bewitched by the idea of e-commerce seem to believe it can be achieved with merely a twitch of the nose. Talk of distribution centers, capital expenses, and all the rest of the real stuff needed to make sales happen elicits groans. And Lycos isn't the only Internet stock to be clocked recently after facing up to the unbearable heaviness of being an e-commerce contender. Amazon.com (Nasdaq: AMZN) shares lost over a third of their value after CEO Jeff Bezos said the firm would invest heavily in building an infrastructure. Amazon's stock was even whacked for a quick 8% loss on Monday after the company reported it would offer 50% discounts on bestsellers, a move that wasn't just predictable but absolutely essential to Amazon's long-term strategy. Amazon follows its plans; investors wince. Go figure.

Charles Conn, CEO of Ticketmaster Online-CitySearch, had it right when he told Bloomberg, "It is short-sighted on the part of Internet investors, including CMGI, not to create the kind of businesses that I think will emerge in the future, that join together traditional broadcast assets... with Internet assets and commerce in a more natural way." True, Lycos and USA walked away with an attractive joint-marketing pact. Yet, Conn is probably right about that as well. "I don't think any of the portal companies have done a good job integrating commerce naturally into people's information-gathering and entertainment experience, and I think it will be harder to do that at arm's length than it would have been in an integrated fashion."

Given the way Internet mania is breeding fantasists at an astonishing rate, I'm not stupid enough to predict that it will all end badly, at least not anytime soon. But the Lycos episode ought to give sensible investors pause because it suggests that a tremendous amount of power currently resides in the hands of folks who, at best, have a farcical sense of how the Internet will develop. It suggests that Internet speculators simply haven't given much thought to what they're buying or why. They just want the stocks to keep going up. What will their reaction be when they're forced to get a clue?